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    Annuity Value and the Lottery

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    Please include in your response the formulas needed for this problem, as well as a detailed explanation as to how to solve them.

    The $40 million lottery payment that you just won actually pays $2 million per year for 20 years. If the discount rate is 8 percent, and the first payment comes in 1 year:

    a) What is the present value of the winnings?
    b) What is the first payment comes immediately?

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    Solution Preview

    The present value P of periodic payment K per year at the rate of i for n years is given by:
    P = K [ (1+i)^n - 1 ] / [ i*(1+i)^n ] ...

    Solution Summary

    Annuity Value and the Lottery are computed.